Brux column: The economics of the budget, budget deficit, and national debt

This opinion column will address the economics of current policy issues. Writer Dr. Jackie Brux is an emeritus professor of economics and founder/director of the Center for International Development at UW-River Falls; and author of the college te...

Written By:
Dr. Jackie Brux |
Apr 8th 2019 - 5am.

This opinion column will address the economics of current policy issues. Writer Dr. Jackie Brux is an emeritus professor of economics and founder/director of the Center for International Development at UW-River Falls; and author of the college textbook, “Economic Issues and Policy.”

No, please don't be frightened away from these topics, as they are easy to understand. And, despite being lost in recent political drama, the budget is particularly important to our citizenry.

The president (along with his non-economist chief economic advisor, Larry Kudlow) submitted the new budget proposal to Congress on March 10 for fiscal year 2020 (October 2019 through September 2020). Let's take some mystery out of these topics, and then move on to examining the president's proposed budget itself.

First, the budget deficit is the excess of government spending over government tax revenue in any one year. The government must borrow the difference.

The federal government borrows by issuing government bonds and treasury bills. Anyone who purchases these government securities is lending their money to the government, to be returned at some future date along with interest. No one is forced to buy government securities; they do it out of self-interest. Government securities are virtually risk-free and therefore desired by people who do not want to undertake significant risk on their investment.

The national debt is the total amount of money ever borrowed by the federal government that has not yet been repaid. Each year that the government experiences a budget deficit, this amount is added to the national debt. The president's budget proposal will create a budget deficit of $1.1 trillion, the highest in a decade. This will be added to the current national debt of $22 trillion. (It's interesting that during his campaign, Trump promised to pay off the national debt in eight years.)

Gross domestic product (GDP) is the value of our nation's production, and therefore an indicator of U.S. capacity to repay debt. Most economists are not particularly concerned about the national debt, unless it gets extremely high relative to GDP and is expected to get significantly higher. (Unlike individual households, the government can "roll over" the debt by borrowing from others to pay back previous debt when it comes due.) The alarmist cry of saddling our children with an enormous debt is contrived. Those who lend their money to the government are the ones who are repaid.

Of greater concern with the debt is the interest payments the government must pay each year to the buyers of government securities, especially if this is financed through tax revenue. Beyond this, however, the primary problem associated with budget deficits and the national debt occurs when politicians frighten citizens into accepting unacceptable domestic budget cuts. This gets us to the heart of the president's budget proposal. Among others, his proposal would:

• Increase spending on the border wall by $8.6 billion. (This is in addition to the $8.1 billion demanded by the president through his declaration of a national emergency.)

• Increase defense spending by 5 percent ($750 billion), which is more than the Pentagon requested.

• Decrease funding for the Environmental Protection Agency by about a third ($6.1 billion).

• Repeal the Affordable Care Act (Obamacare).

• Decrease funding for Medicaid, food stamps, and housing assistance for low-income individuals by $327 billion over 10 years.

• Reduce spending on Medicare by $846 billion over 10 years, and on Social Security by $26 billion.

The budget's reduced spending on domestic social programs, which is $2.7 trillion over the next decade, is the largest cut in history and alarms almost everybody. This would take place in the context of the 2017 Republican tax bill, which reduces taxes by $1.5 trillion, mostly for corporations and the nation's highest income earners. (At the time the bill was passed, many Republican legislators were thrilled by the deficits it created, stating this would allow them to demand cuts in social programs.)

Does this budget worry you? It should, as it would harm most of us. Most specifically, it harms the poor and elderly, as well as our healthcare and our environment. By reducing development assistance, it harms the global poor and reduces our economic security in a world where the poverty created by global conflicts creates greater risk for us all.

Most of all, the budget establishes a blueprint for Trump's reelection campaign. As spending appropriations go through Congress, we may want to think about some of these specific budget proposals again more carefully.